Fair Spread Value Factor in Corporate Bonds
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Putting Credit Factor Investing into Practice
Hendrik Kaufmann; Philip Messow
- ?Quoniam Asset Management GmbH
- ?Robeco Quantitative Investments
Strategy in a nutshell
Universe: USD-denominated IG bonds (Financials, Utilities, Industrials) from ICE G0BC index, excluding government and securitized bonds. Estimate fair OAS using ridge + adaptive LASSO regressions on bond and issuer characteristics. Value signal = market OAS – fair OAS. Long top quintile, equally weighted, monthly rebalanced.
Economic rationale
Captures undervalued bonds: market OAS > fair OAS signals underpricing. The strategy relies on robust ML-based fair value estimation, using multiple financial and market variables to identify mispriced bonds reliably.
Backtest performance
Annualised return2.1%
Volatility2.1%
Sharpe ratio1
Maximum drawdown-7.4%